ECONOMY

Frank Pushes Back Against Liberals on Risk Retention

Rep. Barney Frank, D-Mass., criticized liberals on Monday for taking the financial services industry’s side in an effort to weaken standards from the Dodd-Frank financial reform law intended to clean up the securitization markets.

“I am troubled because there is an assault now on risk retention … unfortunately some of my friends in the advocacy groups are involved in this,” he said. “I’m in disagreement with some of my liberal friends.”

Frank spoke as the one-year anniversary of the reform law approaches; missed implementation deadlines and enormous pushback from Republicans have dogged reform efforts.

At issue is a risk-retention provision designed to prevent lenders from underwriting shoddy loans and profiting by offloading all the risk when packaging them into securities -- actions that contributed to the financial crisis.

The law requires lenders to maintain 5 percent of a mortgage’s credit risk when securitizing it, unless the loan meets certain standards designed to ensure it will not go bad; and to do this, regulators have proposed requiring borrowers to have 20 percent down payments.

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But consumer and mortgage-industry groups argue the proposal would make it too costly for the majority of consumers to buy a home.

Frank, however, argued that before the advent of securitization, lenders maintained 100 percent of the credit risk and that they now should be able to cover losses on their loans or not offer them.

“If you listen to these people, you have to wonder, how did we get any mortgages made before 1986? If securitization is essential to mortgages and risk retention ruins securitization, what the hell were all of these people living in?” Frank asked rhetorically.

Frank agreed a 20 percent down payment was too high and should be reduced to somewhere in the low- to mid- single digits, but he said making it harder to get a loan could be a necessary consequence of improving financial stability.

“Yes, it’s disruptive, because we had to disrupt a rotten system. We had to disrupt a system which collapsed, and it collapsed because risk was made to appear to disappear.… Risk didn’t go away, it just accumulated elsewhere and exploded and rained on all of us and caused terrible problems,” he said.

The Coalition for Sensible Housing Policy, which includes industry and consumer groups, responded to Frank with a press release that said, “Risk retention is an appropriate policy when it targets risky loan features.” But it also said the proposal goes too far and would unnecessarily choke off credit. “The coalition believes this is an unnecessary trade-off that would have a disproportionate impact on moderate income and minority families,” the group added.